The Correction

The heavily anticipated correction finally arrived and somehow it caught everyone by surprise. As is the case in any correction, the market seems fraught with panic and confusion. “How low will it go?” What is the cause? These are the questions being asked broadly, and addressed by every so-called expert the media can find. In reality, as is the case in all markets where the investors were ill-informed to begin with and just jumped in because it felt right, nothing the pundits will say could allay their fears, and if the correction isn’t reversed in the early part of this week more selling will surely result.

That paragraph above could just as easily be describing Bitcoin as it could the U.S. stock market, and that is perhaps the most telling and indeed frightening thing that could be said, because the underlying assets have very little in common. Bitcoin is a vehicle upon which one could place a bet, not unlike a horse at the racetrack or the colors black or red on the roulette wheel. It has zero intrinsic value and has no connection to any stream of cash flows. In fact, it exists in the ether of the internet and is not readily exchangeable into very much. An “investment” in Bitcoin is a bet that governments will look the other way, either foolishly or by intent, and sit idly while its ability to govern and control its society through the all-important control of its currency is undermined. We can see that the smarter, more efficient, and controlling governments like China moved first to outlaw it, and soon enough the clunky U.S. government will get around to understanding things and squash it too, and the last remaining gamblers will be wiped out. To think that the market for Bitcoin resembles that of the U.S. stock market is what is really scary though, in that it tells us the mindset of our nation’s “investor” class.

How many stock market investors made their investment decisions through a well thought out analytical process during which they studied the companies they were planning to purchase ownership stakes in? How many wondered about the impact of the Fed’s plan to reverse its historically easy monetary policy upon their companies’ valuations? How many thought through the impact that the hordes of investors, mostly unsophisticated, who jumped into ETF’s in record numbers would have on their investments as they ran for the exits at the first sign of trouble and forced liquidations of positions in a weakened market?

The real risk in our system is the risk that people don’t really understand or appreciate risk. A decade ago, after an historic bull run and an equally historic correction, the Fed and the U.S. government decided to bail everyone out rather than allow consequences to be suffered. Since then, asset values have gone straight up ( or currency, when measured against those assets, has gone straight down). Investors have gone all-in on risk assets, fearing they’d miss the rally, and rightly so as cash turned out to be a deadly holding. The risk of loss, as a result, has gone underappreciated. Very soon the Fed might be facing the difficult decision of whether to once again bail out the nation. I find it hard to imagine they will be able to withstand the pressure to do so.

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